>> he's still talking about his restaurant. >> what do you think i should have done, martin? what kind of work? >> you have done nothing wrong. >> work, work. >> have a great day, everybody. >> see you tomorrow. i'm jim cramer and welcome to my world. you need to get in the game. firms are going to go out of business, and he is nuts! they're nuts! they know nothing. i always like to say there is a bull market somewhere. "mad money," you can't afford to miss it. hey, i'm cramer! welcome to mad money. welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is to entertain, to coach, to educate, to teach. so call me at 1-800-743-cnbc. investing ain't easy, but it can be a whole lot easier and much less daunting than you probably think with a little instruction. the whole business of managing your money is made much more confusing and difficult because of all the arcane terminology. i call it the authentic wall street gibberish.
and if you're not clued in, it can sound like the pros are speaking an entirely different language. you got to remember that there is an entire industry of people who want you happily convinced that investing frankly is too hard. head scratch, just head scratch. that ordinary people like you and me can't do it, and the safest thing is to give your money to a pro. now, maybe that is the right thing to do for some of you, particularly the time constrain. but if you put in the effort, ultimate would be if you could put in one hour of home work per week of stock, then at least i know you can beat these professionals. the fact of the matter is many of the pros are after your fees, more interested in taking your money than making you money. and that often means keeping you a little bit ignorant about the market so that you'll stay in your stock chains. i like to compare them to the the wizard of oz. they don't want you peeking at the man behind the curtain. they don't want you to understand because if you did, then you might very well take
control of your own finances, pick your own stocks, and not pay someone else potentially exorbitant fees to do things that you are perfectly capable of doing yourself. and that's where i come in. tonight i'm pulling back the curtain. i'm explaining everything, because while authentic wall street gibberish can sound complex, even impenetrable, it's not rocket science. it's not brain surgery. you don't need to go to business school or work in an investment bank to understand it. you can comprehend all the mystical sounding vocabulary that we throw around, as long as you have a translator, a coach like me who can explain what the darn words mean. i want you to think of me as a defector, someone who used to play for the other team, managing five million, but is now playing for you, teaching you to navigate through the mine. forget "the da vinci code," forget "the enigma." to be an investor, you have to
break the wall street code. i'm here to help you try to crack it. that's why tonight i'm giving you my wall street gibberish to plain english dictionary. consider this a glossary of the most important terms that you absolutely must understand if you're going to actively manage your own portfolio, words and concepts that many people in the financial industry don't want you to get your heads around since then you might actually feel empowered enough to pull your money out of their mutual funds and stop handing over your fees and commissions. even if you're a pro, you may not know enough. why not take advantage of my 30-plus years of investing experience and give yourself an extra edge. let's start with a couple of extremely important ideas that go hand in hand. these are the things that baffled me. i had them first explained after listening to ten years to "wall street week" with the great louis. cyclical and secular.
you hear them all day, but no one but me ever bothers to explain what they mean, even though they are crucial when it comes to picking the right stocks. cyclical has nothing to do with the spin cycle of your washing machine or wagner's ring cycle. we say a company is cyclical if it needs a strong economy in order to have its earnings grow. it's cyclical because it depends on the business cycle. so who is cyclical? u.s. sel. they need the economy. nucor, right? ingersoll rand. some of the raw materials play, vale. how about a dupont, a ppg. that's the old pittsburgh plate glass. these companies, even though they're well run, all of them, are all hostages to the
vicissitudes of the economy. when it heats up, oh, man, when it heats up, i got to tell you, there is no stopping them. you know what they do? they earn a ton of money. and we're willing to pay more for those earnings. but when it slows down -- >> sell, sell, sell! sell, sell, sell! >> they earn less money and investors pay less for the shares. a secular growth company is one where the earnings keep coming regardless of the economy's overall health. you can eat, drink, smoke, brush your teeth. you've got consumer staples like proctor and colgate, the foods like general mill drugs like pfizer or merck. these are the classic recession-resistant stocks that you want to buy when the economy slows down and investors flock to stocks that can generate safe, consistent earnings. you don't stop eating food or brushing your teeth just because of a recession. but you know what? then again we also know that these stock don't outperform the others, don't do better when the economy is in full speed motion. so why is the secular versus cyclical so important? why is it the first piece of jargon i'm translating for you
tonight? because it matters to the big institutional money managers. those are the guys who have so much money to throw around that their buying and selling actually drives stocks up and down. that's the anatomy of the game. that's the single biggest determine of where prices go in the short-term. the whole hedge fund playbook is about when to buy and when to sell cyclical stocks and when to buy or when to sell secular growth stocks based on how economies in this country and around the world are doing. this is what drives their decision-making process. remember, about 50%, 5-0, of any individual stocks comes from its sector. it's performance, 50% of it. which is just a fancy word for the segment of the economy a stock falls into like tech or energy or machinery or health care, finance. and when it comes to sector, much of the moves are driven by whether they fall into the secular growth or cyclical camp. you don't want to own much in the way of cyclicals when the
economy is slowing, when it's braking. those stocks are simply going to get crushed. they always do. there is nothing you can do about it. it is etched in stone. by the same token, when business heats up and the cyclicals are doing well, nobody wants to own the boring, consistent recession-proof stocks, the smoke stocks, the soap stocks. you will not make money in those stocks. you could lose it, even though you think they're consistent growers. oh, and this can help you understand another needlessly opaque piece of investing technology, what is known as a rotation. that's just when money flows out of one of the cyclical groups into a secular growth. that's just what happens. we call them rotations. it has nothing to do with volleyball. now, this is probably completely antithetical to what you have been told about how to invest. if you're going to pick your own stocks, something conventional wisdom regards the height of idiocy and lunacy because you're not supposed to be able to beat the market, you find high quality stocks and stick with them through thick and then.
eventually if you hold out long enough, maybe you'll make some money. this is the brain-dead philosophy of buy and hold that i spend so much time trying to debunk, a strategy that has not worked for ten, has not worked for 20 years. but they never seem to think it has gone out of style. it's a zombie ideology that refuses to die even though it's been discredited by the actual empirical performance of the market. as i explained in "getting back to even" in the first three chapters just to start to get you to start dealing with the volatile, tough market we are in. once you recognize how powerful the secular versus cyclical distinction, you can see why buy and hold is just darn-right stacked, outright silly. if you're going to own stocks through thick and thin no matter what, you need to be prepared to lose money in the cyclicals when they're out of favor. most people can't do that. you need to be able to tread water or decline in while the cyclicals are roaring. why take the pain when you can avoid it? and most people can't take the pain so, they sell at the bottom.
it doesn't mean you should play the rotation game and only own the group that is in style. not at all. remember the need for diversification, another important piece of investing vocabulary, simply means don't have all your eggs in one basket. to me you're diversified when no more than 20% of your portfolio is in one single sector. a rotation takes down you're sick cal stocks because you have secular growth names that are going to hold up much better, or even make you money at the same time. here is the bottom line. yes, investing isn't easy, but it doesn't have to be mystifying. you just need to learn the language. know the difference between cyclical and secular. register the sector rotation when you see one, and always stay diversified. jason in new york, jason? >> caller: hi, jim, how are you doing? this is me jason from harlem. >> good to have you on the show. >> caller: thanks for being here. when investing in international stocks or etfs, do you evaluate them like you would u.s.
companies? >> yes, provided, and that is a great question, jason, provided they sell at what is known as a -- provided they have adrs. you need american depository receipts. why? i need to be able to compare their s.e.c. filings with ours. if they don't have s.e.c. filings, i absolutely don't even think about them. jason, they're too hard, they're too opaque. if they have adrs, i'll make the compares and we'll be fine. steve in california. steve? >> caller: hey, jim! boo-yah california in los angeles to you. >> man, my old city, my old hometown. how can i help? >> caller: well, i first want to thank you for getting me back in the game. i've been on the sideline for year, but i love your show and i'm reading your new book and i'm back in. >> that's what i want. you got to get the dividends going. you can beat bank. you can beat the stocks that don't have the dividends, and you can certainly beat cash. how can i help?
>> caller: that's what i'm looking at. i'm looking at stocks that have good yields for my ira. >> very smart. >> caller: and i'm reading your chapter on dividends. i want to figure out the difference between an accidental high yield achiever or something that is too good to be true. i've been doing the homework, and i've got a couple of stocks that they look like they should be bought, but i'm nervous about them. >> okay, you got to go back to cash flow. you can't measure a stock based on the earnings or else you would have sold at&t a long time ago because it doesn't look like it's earning the dividend. you would have sold a lot of this very special master limited partnerships i like. you need to look at the cash flow, not the earnings. the earnings aren't telling the truth. go through the chapter in "getting back to even" on cash flow and you will understand that it will take me a half hour. that's a very hard chapter. but that's what you use. bill in new york. bill? >> caller: boo-yah, jim! >> boo-yah, bill. >> caller: some time ago you mentioned that the market was going up and that foreign money
was coming into the market. how do you know where the money is coming from, be it europe, asia, or the sidelines? how do you measure it and its significance? >> the federal reserve actually releases figures about whether money is coming in from foreigners or not. that's how you measure it. what i also like to look at is when the currency gets strong, you tend to see a lot of money coming from overseas because, remember, the foreigners want both -- they want double whammy performance. they want a stock to go up, and they want the currency to go up. when you see the dollar go up and the stock market stabilizes, that tends to bring new money in. but the market has to stabilize or the money doesn't come in. they're not just going to make a bet on currency if it looks like the stocks are going to go down. mastering the language of the market is key to mastering your domain. don't let wall street gibberish get the best of you. always stay diversified. stay with cramer too. does the market have you stumped? no fear, cramer is here. just e-mail him, firstname.lastname@example.org.
miss out on some "mad money"? get your "mad money" text alert today. text "mm" to 26221 to get cramer right on your phone. for more info, visit madmoney.cnbc.com, or give us a call at 1-800-743-cnbc. [ male announcer ] this is lois. the day starts with arthritis pain... a load of new listings... and two pills. after a morning of walk-ups, it's back to more pain, back to more pills. the evening showings bring more pain and more pills. sealing the deal... when, hang on... her doctor recommended aleve. it can relieve pain all day with fewer pills than tylenol. this is lois... who chose two aleve and fewer pills for a day free of pain. and get the all day pain relief of aleve in liquid gels.
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tonight i'm helping you translate the cryptic and occasionally unfathomable terminology that makes owning stocks so darn difficult. i'm giving you the phrase book to navigate through the world of investing. hey, you know what? i call it the cramerican dictionary, but it's real kind of a michelin guide to fine stock dining. for tearing back the cloak of mystery that can make managing your money seem like an impossible task -- >> the house of pain. >> when it really is -- >> the house of pleasure. >> it shouldn't seem as difficult as, say, conducting triple bypass surgery on yourself. you don't have to be stephen hawking or albert einstein to understand this stuff, although with a lot of the pros, when they talk about stocks, i bet
even einstein would have a tough time even figuring out what they're saying. now i just explained the difference between cyclical companies -- think industrial smokestack companies that need a healthy economy in order to grow earnings -- versus the secular growth companies, thinking corn and toothpaste that stay on about the same pace regardless whether we're in an upturn or a downturn in the business cycle. i told you have to sell the cyclicals when the economy starts slowing down. and then you got to do the reverse as it starts to pick up steam. this is -- why do i have to tell you this? it's the playbook that all the hedge funds use. and even though the hedge funds can often behave like herd animal, wildebeests who buy all the stocks and sell at the same time, the playbook, we're stuck wit. it works because they've got the big money. so we've got to learn it, and i can teach it. the reason for that has to do with another piece of wall street gibberish lexicon that you absolutely must know if you're going to pick your own stocks. and don't blank out on me because you hear it all day and you're probably wondering still what does it mean.
it's the price-to-earnings multiple, or the p/e multiple. or in total shorthand, just the multiple. you'll hear that. the multiple is too cheap. the multiple is expensive. they these refer to the same thing. its way we compare. in fact, when you hear talking heads pontificate how over one stock has become overvalued or undervalued? they're talking about the multiple to earnings and whether it's 250 high or too low. when you hear someone say pepsi is more expensive than coke, they don't mean that coke is cheap because it's trading at 55 while pepsi is pricey because it trades at 65. a common mistake people make. no, it tells you about a price evaluation vis-a-vis another stock. to make true comparisons, you have to take a step back. when you buy a stock, you're actually paying for a small piece of a company's future earnings stream. so to value a stock, you have to look at where it's trading relative to the earnings per
share, which you'll often see rendered as eps, earnings per share. and that's what the multiple allows you to do. here is the basic algebra. it's not even math. it really is algebra, okay, that i believe most people in high school can do. maybe middle school. middle school we had it. the share price, "p," equals the earnings per share, "e," times the "m," multiple. "e" times the multiple produces what the share price is. that's how we figure out how stocks get a price. the multiple tells you how much investors are willing to pay for a company's earnings. we don't care that coke stock might be at 55. we care that it sells at 15 times its earnings share. we don't care that pepsi might be at 65. we care that it sells at 14 times its earning share. that's how we compare. the multiple is the special sauce. the medium in that sauce, growth. how much bigger the earnings will be next year than they were this year. by the way, not the previous year.
we don't care than. we care about the future, not the past. we care about the earnings of the year after that and the year after that, and so on. the stocks of companies with faster growth tend to get rewarded with higher multiples. why? remember, the multiple is all about what we're willing to pay for earnings. and the more rapidly a business grows, the bigger its future earnings will be. so if a fast grower like chipotle, okay, the fast food mexican food place, let's say it sells for 24 times earnings. that doesn't make it slower than pepsi at 14 times earnings. why? because chipotle deserves the bigger multiple because it has a higher growth rate, 24% versus 8% for pep it is. remember, we're trying to compare growth rates. we're using what is known as multiple analysis. now here is where it gets really interesting. multiples aren't static, another confusing thing for people. in different markets, people will pay more or less for the same amount of earnings. when they pay more, you know what we call that? that's called multiple expansion.
we pay more and the multiple goes higher. when they pay less, it's called multiple contraction. two more terms that sound much more complicated than they really are. if you're going to own stocks and figure it out yourself, you have to understand them. it's what hedge funds play the game with what is known as sector rotation. of course, the earnings aren't static either. when you buy a stock, you're making a bet that the "e," the earnings, or the "m" part of the equation is headed higher. so what goes into the earnings? how do you make sure they're increasing and aren't about to collapse? here is more vocabulary. when you hear about bottom line or profits or net income, they all mean the same thing, earnings! we call it the bottom line because the number is the bottom figure on a company's income statement. to figure out how quickly a company's earnings can grow in the future, you have to look for clues when it reports its quarterly results. that's why i'm always telling you to listen to the conference calls. hey, listen, if you want to do it yourself, you got to go the homework. that means to look at the top
line, another unnecessary piece of wall street gibberish. remember, i'm trying to translate everything tonight. it's totally interchangeable with revenues, revenues, top line, which is the same of sales. they should use one word. say only sales, but they all mean the same thing. you want two see strong revenue growth, strong sales growth, okay, which tells you there is demand for a company's product. this is ultimately the key to the ability of most businesses to sustainably grow their earnings long-term. that's why it's important for younger, smaller companies to have fast-growing revenues. and investors will really pay out for accelerating revenue growth, that's arg, another term. that means sales are growing at a higher and higher rate than the previous years. with a more mature company, it should be able to turn its revenues into profits by cutting costs and then returning the profits to shareholders in the form of a dividend or potentially a buyback, though we think dividends are more attractive as they put money directly in your pocket. the other only helps when you sell the stock. beyond the top line and the bottom line, it's crucial to
consider the gross margin, which is in no way disgusting, not the least bit marginal. the gross margin tells you what percent of every dollar sales becomes profit. and it's super important to figure out how much money a company can make. to figure out the gross margins, you have to consider the competition, the cost of production, the cost of doing business in general. business was cutthroat competition like supermarkets or airlines, they have terrible margins, while a virtual monopoly like microsoft has margins that are downright obese. how about the oil business? the margins swing up and down with the price of crude. here is the bottom line. you need to know the vocabulary before you can evaluate a stock. when you're comparing, i want you to look at the price-to-earnings multiple. i want you to look at the growth rate, the top line, the bottom line, and the gross margins. that's how we do it. you can do it too. stay with cramer. this great reunion in austin.
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tonight i'm going into pen and teller mode, demystifying all the overly complicated technical-sounding wall street gibberish -- >> buy, buy, buy! >> at your own time, but may never actually understand. i'm translating the most overused, underexplained terms in the investing business into language you can comprehend.
it always reminds me of listening to the football game, the dime package, the nickel package. you have to know what that stuff is you're going to coach, right? tonight you have to consider this your wall street to english dictionary. it's a televised glossary to help you navigate your way through tough markets. much more important than the nickel and the dime package, and more important, the tough-sounding terminology that confuses people, makes people give up, makes people say you know what? it's too hard for me. it isn't. i will explain it. the fact is all this investing terminology sounds difficult because the pros who speak wall street gibberish fluently, well, they want it to sound difficult. they want you terrified. they want you feeling totally ignorant. [ buzzer ] at a complete loss when it comes to managing your own money. my mission is just the opposite. i'm here to enlighten you. >> the house of pleasure! >> to teach, because i know that you can do better for yourself than the professionals, who many just want your fees and commissions. i got to tell you, that is --
look, i'm from the business, all right. now it's not enough for me to come out here and tell you which stocks i like, because that's what i used to do when i started. you know what? that doesn't work. i need you to understand. you can't own 'em without understanding them. knowing what you own is a must. it's one of my cardinal rules in the show. if you don't have a good grasp of how your holdings make their money, you won't have any idea what to do when the stocks turn against you, and believe me, at some point they will. you don't know. you don't know when to hold them and know when to fold them, in the immortal words of kenny rogers. let's say you're actually holding and what makes you want to fold. in this case, sell the stock. along with what would make you think the story is still intact and maybe at this lower price you should be buying, not selling. now the fact is the profusion of arcane terminology on wall street makes it much harder to know what you own. let's continue with another ultra piece of verbiage that is hardly every explained to you. the fundament of my thinking,
the risk reward. the risk reward analysis pretty much defines the short-term stock picking which all the professionals do. what does it mean? let's break it down to component parts. assessing risk is figuring out the downside, how much you potentially stand to lose in a given stock, how far it can conceivably fall in the near term. assessing the reward is all about figuring out how the potential upside could be. >> hallelujah! >> how many points of gains the stock could give you. many people when they analyze a stock they only focus on the potential upside. because of this, that's a grave mistake. it's more important for you to understand the side of the risk reward. because the pain from a big loss hurts a whole lot more than the pleasure from an equivalent-sized gain. take that from me. let me translate the pain of my losses to you. how exactly do we figure out the risk and the reward? okay, these are determined by two different cohorts of investors.
the reward, the upside, is defined by how much growth-oriented money managers could be willing to pay for a stock, well, let's just say they create the top. the risk, the downside is created by what value-oriented money managers would be willing to pay on the way down. they create the bottom. growth guys, top. value guys, bottom. figure out the risk. you need to consider where the value guys will start buying on the way down. you got to think where even the most bullish of growth guys will start their -- >> sell, sell, sell! >> when asked, i usually boil the risk reward down to something quick and dirty, like five up, three down. but how do i get there? how can you know where growth money managers will start selling? >> sell, sell, sell. >> and where the value guys will finally start? >> buy, buy, buy! >> to do that, you need some insight into how they think. i have been both. i've changed my stripes accordingly. requires you to know an esoteric piece of wall street lingo.
it's growth at a reasonable price, aka garp. growth at a reasonable price. when we talk about growth at a reasonable price, that's not a subjective criteria. it's a method of analyzing stocks that i first read about from peter lynch, the great money manager up at fidelity. it's comparing a stock's growth rate to its price-to-earnings multiple. growth rate, p/e multiple. if you figure out the maximum, you need to be able to look at the world according to, yes, garp. here we use a quick and dirty rule of thumb. it's hardly ever let me down. some exceptions, but that's okay. this is a rule that can really help us figure out when a stock is overvalued or undervalued based on what the growth and money managers will be willing to pay. if a stock has a price-to-earnings multiple that is lower than its growth rate, lower than its growth rate to p/e, the stock is probably considered cheap.
any stock selling at a multiple twice the size of its growth rate or greater is probably too expensive. when i see, that you call, i see twice the growth rate, i don't even think. >> sell, sell, sell! >> i'm going to miss winners, but that's okay. say it's trading 20 times earnings, i don't think it's going to go much higher than it already has. it's reached my two-times growth ceiling. here is another piece of wall street gibberish that can simplify this process, the p.e.g. ratio, p.e.g. what is that? the price to earnings to growth rate, or the stock's multiple divided by a stock's long-term growth rate. a p.e.g. of one or less is extremely cheap. and two or higher is prohibitively expensive. like say going until its heyday from 2004 through 2007 could sell for 30 times earnings and still inexpensive, that's right, cheap, because it had a 30% plus long-term growth rate.
that's a p.e.g. rate of just one, right at the cheap end of the spectrum. and the growth kept accelerating, sending the stock to new high after new high. why did you think it could keep going up? i do p.e.g. rate analysis. where did i come up with these numbers? observation. the value investors, who will be attracted to stocks selling at p.e.g. rates, p.e.g.s of one or less create the floor. find a buyer if it's at or below its growth rate. the growth investors hardly ever pay more than twice the growth rate. that's the p.e.g. rate of two. which means there is almost no way that stock goes higher. to stick with the example of google when it had the mega growth mojo, the 30% long-term growth rate, it would have become a sell if it traded up to 60 times. too high. like with any of my methods or anyone else's for that matter, this one is a rough approximation.
it's useful, especially when you're trying to figure out the risk reward. but it's not always right. a lot of times a stock will get cheap simply because the estimates need to be cut. that's what happened to the banks and brokers right before the financial crisis. they all looked cheap. or it will look cheap relative to its growth rate, but that's because the growth rate is slowing like the dell during the dotcom collapse during 2000 to 2003. as the competitors copied the company's business model and ate into its earnings power. in those case, the stock traded well below the one times growth floor. the p.e.g. kept sinking and sinking. it's what is known as a value trap. on the other hand, the best time to buy cyclical stocks, the smokestacks is when they look outrageously expensive because the earnings estimates are way too low and need to be raised to catch up with the reality. you need to know these things. they're not easy. try to make them as clear as possible. the bottom line, know what you own. know what others will pay for it. that's more important than what
you own. that means you need to understand the risk reward, the potential downside and the potential upside before you purchase anything, like figuring out where the growth investors put in the ceiling and the value cohort creates the floor. "mad money" will be right back. ♪ will be sitting at the table
managing your own money is a whole lot less daunting than it seems when you have a translator, someone like me who can help you decode the arcane and intentionally obscure terminology that the pros use to talk about stocks all the time. that's why i've been giving you my televised wall street gibberish to english dictionary, so that you can see through the mystery, understand the essentials of investing without being buffaloed by the talk. so far i've been explaining the complicated-sounding pieces of jargon that are nevertheless essential, unfortunately essential to making money in the market. i say unfortunately because i got to tell you, it is difficult, and it's not an easy thing for me to translate. and i've been doing this for 30 years. but the difficulty goes in two directions. just as there are many concepts that seem complicated, there are plenty terms much less simple than they appear. i want you to take the notion of a trade. a trade, investment, no difference.
that could not be further than the truth. it's the major reason why people don't make money in the market. trade investment are distinct. in the immortal words of the '90s stock gurus offspring, you got to keep them separated. isn't it splitting hairs, something for the folically challenged like myself? might send you searching for a real dictionary or maybe a wiki dictionary? don't forget wiki cramer. no. a trade is not the same as investment. and if you treat one like the other, if you turn a trade into an investment, well, then you are breaking one of the most important commandments. it's the first commandment of trading from "real money: sane investing in an insane world." i'll tell you happens if you break this commandment. my prediction for your portfolio is pain. when you buy a stock as a trade, you're buying it for a specific catalyst, some anticipated future event that you think will drive the stock higher. maybe the company is about to report its quarterly results and
you think it will deliver better than expected numbers. that's a catalyst. although i don't recommend trying to game numbers on the show. that can cause the stock to get clobbered, even if it delivered stellar numbers that is a catalyst. the catalyst can be news about some event you're predicting. if you're dealing with a pharma stock or biotech, there are many when they release their clinical data about drugs. or the fda decides whether or not to approve a given treatment. again, you can do homework. these are all data points that could send a stock soaring if they go your way. so when you make a trade going into it, you know there is a moment to buy before the catalyst and a moment to sell. and that's after the catalyst happens. sometimes your trades won't work out. most of them don't. the event you're waiting for won't happen or maybe your data turns out to be less positive than you expected, or that the stock does nothing on the news. it doesn't matter. either way, when you buy a stock as a trade, it has a limited shelf life. there is only a brief window
where you want to own it. once the window passes, once the event happens, once the catalyst is done, you must sell, sell, sell. it doesn't matter. hopefully you'll turn out to be right and the catalyst will give -- rack up a nice gain. if that happens, there is still no point in sticking around. ring the register. lock in your profits before they evaporate. but if it turns out to be wrong, you still need to sell. you can't just say oh, you know what? that didn't work out, i'll go invest now. i'm done with the trading part. huh-uh. when you buy bottled milk, you don't drink it after the expiration date. a lot of the logic is the same as milk. you can't just buy more and call it a long-termer term investment, because without the catalyst, you really have no reason to own the darn stock. and you should never, ever own anything without a reason. this market is too hard. i've watched an endless parade of people lose money by turning trades into investments. they come up with alibis for staying in a stock long after its expiration date. one takeaway, the expiration date of a trade, they fool themselves into believing they're doing the right thing. and then more often than not,
they get crushed. so remember, without a catalyst, you don't have a trade. if you find yourself in that position, then you had better sell and cut your losses. now an investment, check the cramerican dictionary, it turns out an investment is very different. that's based on a long-term thesis, the idea that a stock has the potential to make you serious money over an extended period of time. you're not banking on an event, not banking on a specific catalyst. you're expecting many good things will happen in the company's not too distant future. that's not an excuse to buy a stock still and then forget about it. we don't do that buy and forget stuff, which is also known as buy and hold. investments can go wrong too, which is why i'm always telling you to do an hour of homework per week per stock. but it does mean that when a stock you like as an investment goes down in the short-term, it makes sense to buy more as long as the fundamentals are sound. you don't have to cut your losses because you like it. it just got cheaper. the corollary here is you don't ring the register after the first time the stock jumps in
price. you're looking for larger gains over a longer period of time when you invest. listen to this. it's going to sound like i did something good, but i was a mistake. the mistake i made was with apple. my charitable trust bought the stock when it was back at 26. that was before the iphone was barely a glimmer in steve jobs' eye. then i turned around and sold it after a quick fife point gain. i threw the investment thesis out the window for the profit. it turned out to be relatively tiny given the gains i would have had if i held it longer term. the investment was meant to make much more. i turned into it a trade. not all wall street gibberish is deceptively complicated. some of it is deceptively simple, like the distinction between a trade and an investment. remember, they're not the same thing. and it's a big mistake to turn a trade based on a catalyst, whether it's successful or unsuccessful into an investment. don't do it. expiration date. think milk. assad in arizona?
assad? >> caller: hey, jim. how are you doing? >> not bad. how about you, sir? >> caller: good, good. i think the show is fabulous. i got a question. i got a few thousand dollars saved up. a teenager goes to college in a few years. >> okay. >> caller: i'm looking for a long-term investment. what should i look in a company for? >> well, when we make a long-term investment, we're looking at the ability of a company to pay increasing dividends over time. that's why i've always recommended a procter & gamble or a 3m. they have been the best dividend boosters in the world. it's why i like a federal realty. it's the best dividend booster in the real estate investment trust. that's what we're looking for to save with, dividend plays where we reinvest the dividends. don't take the dividends and do something else with them. reinvest them and that's how you'll make your money. jim? >> caller: hey, jim. a ba-ba-boo-yah from atlanta. >> stuttering peach boo-yah back at you. >> caller: thank you. i'm more of a short-term
investor. i find my point on trades becomes the resistance after a small rise and a pullback. now it's happened to me several times. and it leads to gains, but very small gains. is there a way i can either use this to my advantage or get in earlier? >> well, you know what? i would say the antidote to that is it sounds like you're putting all the money to work at one level. i think that's a mistake. you got a really good idea. you really believe in the idea. you buy a little bit and hope it comes down so that turns out to be your floor. now here is what matters. the worst that happens with my philosophy is the stock shoots up big. you know what? that's a high quality problem when you have only made a little bit of money instead of losing money. don't do investing buying levels all at once. space them out. pyramid style. michael in idaho, michael? >> caller: hey, jim, my question is based on your advice that we scale out of our investments. >> exactly right. exactly right. >> caller: so what i want to know is how and when -- we can't do that indefinitely.
how and when do we throw that money back into the market and how do we do that without acquiring too many positions? >> these are real portfolio questions. i ought to do a whole show about this question. what i like to do is i want to take half off the table by doing it in stages. you have a $20 stock, it gets to 30, you should be done with half of it. you can let the rest run. the ultimate goal, get the house's money and forget the upnote. never forget, play with the house's money and then you have the freedom to let it run further. that's how we know when we're done selling, when what is left is the house's money. even the simplest sounding wall street jargon can be misleading. always remember cramer's first rule of trading from the book "real money" now in paper book. keep them separated. never turn a trade into an investment, and vice versa, and you'll do much better than everybody else. stay with cramer. and it's very affordable.
it was very delicious. could you please taste car insurance y? this one is much more expensive. ugh. it's really bad. let's see what you picked. oh, geico! over their competitor. you are a magician right? no., oh. you're not?, no., oh, well, give it a shot. i am so, so sorry. it was this close. i'm here to unleash my inner cowboy. instead i got heartburn. [ horse neighs ] hold up partner. prilosec isn't for fast relief. try alka-seltzer. it kills heartburn fast. yeehaw!
welcome back to the wall street gibberish to plain english translation guide edition of "mad money." this is the book in hardback. i prefer the tv version. all night i've been explaining overly arcane and esoteric investing concepts and financial jargon. i'm trying to bust it, help you become a better investor, make the whole process of managing your money seem less daunting. so what else do you need to know? all right, here is one of the most dreaded and poorly understood terms in the business. ready? the correction. what a euphemism. a correction is when after the market has been roaring, it turns around and gets crushed, maybe a decline as much as 10%
is a correction, making you feel like the world is ending, the sky is falling and you never want to own another stock again in your life. and that's precisely the wrong reaction. it may feel horrible, but stocks can and do. could back from corrections. they bounce back from the big declines all the time, especially coming off a major run. think of it like this. when the market goes on a 56-game hitting strict a la joe dimaggio, and joe doesn't get on base the next day, that doesn't mean you'll never make money again with it, does it? it doesn't mean all your holdings will be pulverized. it's what happens when we go up too far too fast. i want you to expect corrections. they can happen to an individual stock, an index, the whole market. they can even happen to bonds, and you will most likely never see them coming. so you shouldn't beat yourself up for not anticipating them. sell-offs are a natural feature of the stock market landscape. we don't got to like them, but we do need to acknowledge that they will happen no matter what.
so don't get so flustered. or worse, i never want to see -- because no one ever made a dime doing it -- panic when they inevitably smack you or whip you in the face. finally, i've got one last piece of investing vocabulary that you must master. the idea of execution. this is a tough one, because it's comparatively subjective. but when we talk about execution, we mean management's ability to follow through with its plans, ones that are laid down in a conference call, one that is laid out at the board meeting in the annual report. when you own a stock, there are all kinds of risks associated with execution, messed up mergers, bad cost controls. the number of ways a bad management team can screw up a company is practically infinite. that's one of the reason why i like companies with proven management teams, because they're much less likely to make these kinds of unforced errors. and it's a big reason why it's so important for you to pay
attention when i bring ceos on the show. nobody knows a company better than the people running it. and since you probably can't get these ceos on the phone yourself, you want to see what they have to say about their businesses firsthand on "mad money." the motion execution is crucial when it comes to understanding why it's worth paying up for best of breed companies. the top players in a given industry almost always with proven executives, hard to find a best of breed in a first year of an executive's career. i don't like ceos in their first year. too dangerous. best of breed stocks are almost always more expensive than their cheaper competitors. people get fooled. they don't want to buy the expensive one. they're wrong. it's worth the price. a good management team is less likely to make mistakes and less likely to get buried by big problems, more likely to figure out how to solve them or turn them into opportunities. here is the bottom line. do not be afraid of corrections or intimidated by people who use the word. a sharp sell-off after a big rally has got to be built in. even though it's hard to quantify, execution is a crucial
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for the 2012 olympic games in london. help raise our flag, add your stitch at teamusa.org. investing is confusing. i've mapped out road rules to help. i'm cramer from cnbc's "mad money." beware cheap stocks. just because a stock is cheap, that doesn't give you license to escape the rules. stay focused. stocks with low dollar values can wipe you out just as easily that ones are expensive, or else you could lose far more than you expected. i'm here to help. "mad money," week nights at 6:00 and 11:00 on cnbc. follow the wings.